Lloyds cuts distressed exposure

Lloyds Banking Group has reduced its local stressed real estate exposure to $800 million after completing a sale of non-performing commercial property loans for 48¢ in the dollar to the Blackstone Group and a Morgan Stanley fund.

The sale was agreed on Tuesday with the UK-based bank expected to complete the deal, dubbed Project Lawson, in the third quarter.

After the sale the two largest non-performing loans held by the local subsidiary of Lloyds, BOS International, will be a $250 million facility to developer Becton Property Group and its exposure to the BankWest Tower in Perth along with Bankwest.

The portfolio sale had a face value of £809 million ($1.276 billion) and was sold for £388 million to AET SPV Management – a joint venture comprised of funds sponsored by Morgan Stanley Real Estate Investing and Blackstone. The Morgan Stanley-Blackstone consortium was funded by Deutsche Bank.

“There was a lot of capital looking for these assets," Lloyds head of business support, Peter Shear, told the Australian Financial Review.

“Many of the assets require additional capital-intensive asset management and a long-term approach to maximising value and there are investors that are better natural owners of the assets." Fort Street managing director Richard Hunt said.

The asset portfolio generated losses of £183 million in the year to December 31, 2011, Lloyds said.

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“This transaction further de-risks the Australian business, and results in a cumulative 92 per cent reduction of our real estate non-performing loan portfolio," Lloyds International chief executive Dave Smith said in a statement to the London Stock Exchange yesterday. “We continue in parallel to focus on growing the profitable core of our business."

The completion of the Lawson transaction follows the sale last year by BOSI of $1.7 billion of distressed property loans to two groups of real estate funds at heavy discounts of about 35¢ in the dollar in a deal called “Project Paterson".

“The opportunity with Paterson was about de-risking and disposing of the assets with longer expected exit time frames; the opportunity in Lawson was to exit the portfolio and put the past behind us." Mr Shear said.

The Lawson auction began with 70 loans but only 59 loans were sold to the consortium, as the bank was able to exit a number of loans separately and was repaid for others.

Besides the two portfolio sales, Lloyds has reduced its exposure to local non-performing property loans from a peak of $7.2 billion though the direct sale of individual loans to funds, receivership and repayments.

The bank last year sold a group of nine property-related loans in the Gold Coast and New Zealand to Pacific Alliance. It also sold the debts of Orchard Funds Management to Morgan Stanley.

Lloyds retains about $400 million worth of Australian non-core, performing property loans. Globally its non-core assets totalled £128.3 billion as of March 31. The bank had previously announced that it expects to reduce this figure by at least £30 billion this year.